Family & Friends Mortgage

TO GET STARTED SETTING UP YOUR FAMILY MORTGAGE TODAY, VISIT: WWW.VIRGINMONEY.COM OR CALL 1.800.805.2472

A GUIDE TO

VIRGIN MONEY LETS YOU SET UP YOUR OWN LOAN WITH FAMILY OR FRIENDS. THEN WE MANAGE IT FOR YOU. ALONG THE WAY, WE’LL PROTECT YOUR RELATIONSHIPS AND SAVE YOU THOUSANDS IN BANK FEES. SOUND GOOD?

FAMILY MORTGAGES

IT’S SIMPLE, ACTUALLY.

WHAT IS A FAMILY MORTGAGE?

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HOW DO I SET UP A FAMILY MORTGAGE?

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TIPS FOR THE BORROWER

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TIPS FOR THE LENDER

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Q&A

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THE SKINNY ON VIRGIN MONEY

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THE LEGAL FINE PRINT

BEFORE WE GET STARTED, WE’D LIKE TO GIVE OUR LEGAL TEAM THEIR MOMENT IN THE SPOTLIGHT. READY... SET... GO!

The Virgin Money Bill of Rights expresses what we think money should be about. Keep an eye on this space for your rights.

TO GET STARTED SETTING UP YOUR FAMILY MORTGAGE TODAY, VISIT: WWW.VIRGINMONEY.COM OR CALL 1.800.805.2472

The materials in this guide should be used for general guidance and informational purposes only and are not geared toward any specific transaction or goal. The scenarios presented are fictitious and purely for representational purposes. Every transaction is unique and questions about your specific loan transaction, its circumstances, or any recent changes to the laws of your state that might affect your loan should be directed to a licensed legal or real estate professional in your state. We recommend that you consult an attorney or tax advisor before entering into a financial transaction of this nature. Virgin Money is not a law firm and does not provide legal advice or tax advice. Virgin Money is not a lender or a loan broker and does not originate loans on behalf of other parties. The information contained herein is the sole property of Virgin Money USA, Inc., and may not be reproduced or redistributed for any purpose without the express written consent of Virgin Money USA, Inc.

REAL PEOPLE. VIRGIN MONEY PROFILES LINE UP A HOME LOAN FROM FAMILY OR FRIENDS. When Amy Semerjian decided to buy a 1904 farmhouse in Northampton, Massachusetts she assumed she would get her mortgage from a bank. Then, her mother made her an offer she couldn’t refuse: use Mom and Dad as her lender. Her mother notes, “I figured, ‘why is my daughter paying the bank when she could be paying me?’” With the help of Virgin Money, Amy borrowed $180,000 from her parents. But this wasn’t a loan sealed with a handshake and a promise. She signed paperwork every bit as official as she would at a bank. As a result, she secured a tax-deductible mortgage at a competitive 5.75% interest rate, avoiding lenders’ fees and keeping the money she pays in the family. Meanwhile, in addition to helping their daughter, Amy’s parents earn a decent return on their investment, which is not easy in these days of low interest rates. “It’s a little bit scary borrowing from your parents, but this is an official thing,” said Amy. “And in our situation, it’s to our mutual benefit.” Amy’s parents are now earning $1,200 a month from their daughter’s loan. “The mortgage was actually $173,000, but she wanted a little extra for shoes,” joked her mother. “It’s so nice to keep it in the family.”

WHAT IS A FAMILY MORTGAGE? A private mortgage is a loan between private parties, usually two individuals, which is secured by real estate. Just like a traditional bank mortgage, a private mortgage might be used to buy, renovate, or refinance a home, or even as a way to secure a personal loan used for other non-real estate purposes. A private mortgage can provide the structure of a bank mortgage while retaining the flexibility associated with loans between relatives and friends, resulting in a win-win transaction for both the borrower and the lender. When the loan is between family members, we call it – you guessed it - a family mortgage. You can use our Family Mortgage in many of the same situations you might use a traditional bank mortgage, such as, to: Help purchase a home. The money can be used for the entire purchase of the home, for the down payment, or to supplement bank financing and avoid paying Private Mortgage Insurance (PMI). Refinance a bank mortgage. The money can be used to lower the interest rate, to eliminate PMI, to keep interest payments within the family rather than paid to a bank, or to achieve more favorable terms. Formalize an existing home loan from relatives. Home loans from relatives made in the past can be formalized to realize tax benefits, such as interest deductibility, capital gains write-offs, and legal benefits (e.g. probate, legal protection). Renovate a home. The money can be used in place of a home equity loan. When you or someone you know needs mortgage financing, consider a Virgin Money Family Mortgage. Here’s why: Family Mortgages keep the money in the family. Interest is going to have to be paid on the mortgage, whether it is to a bank or to a family member. Why not pay it to someone you know? Family Mortgages create a win-win situation for the parties involved. It is possible to design a private mortgage so that lenders generate a higher return than they would in a money market or a savings account, and so that borrowers get lower interest rates than they would with a traditional lender.

TO GET STARTED SETTING UP YOUR FAMILY MORTGAGE TODAY, VISIT: WWW.VIRGINMONEY.COM OR CALL 1.800.805.2472

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LEARN MORE... ...CAN I USE VIRGIN MONEY FAMILY MORTGAGE FOR MY DOWN PAYMENT? Yes, a family loan is one way to come up with the money for a down payment on a home. Many banks insist that borrowers retain at least an 80/20 debt/equity ratio in their new home. Typically borrowers who can’t come up with 20% of the purchase price for their new home must pay Private Mortgage Insurance (PMI) at a high rate. We can help you bridge this gap. Call us if you need help working with your bank to use a Virgin Money Family Mortgage for your down payment.

Our Family Mortgages create a win-win situation for the parties involved. It is possible to design a private mortgage so that lenders generate a higher return than they would in a money market or a savings account, and so that borrowers get lower interest rates than they would with an institutional lending source. What’s in it for the borrower? Plenty. Here are just a few benefits to consider. A low interest rate: Often, interest rates charged through intra-family arrangements are lower than rates charged through banks and traditional lenders. On average, private mortgage interest rates are between one half and one full point lower, and that can add up to thousands of dollars in interest savings over the life of the loan. Flexible payments: A private mortgage can be designed to allow a level of flexibility in the repayment schedule not available in a loan from banks and traditional lenders. For example, payments can be temporarily paused, shifted to the end of the loan, or reduced for a predefined period of time - as long as the lender agrees to the change. That is something a borrower could never achieve with a bank mortgage. Tax deductible interest: If a private mortgage is properly formalized, the borrower can usually deduct the mortgage interest charged, just like a traditional bank mortgage. If a private mortgage is properly set up and is legally binding, lenders find the transaction also benefits them for the following reasons. A strong investment vehicle. Family lenders are able to generate a good interest rate relative to comparably safe investments such as money market accounts, certificates of deposit, treasury notes, etc.

DREAMS You have the right to big, fat, humongous dreams. That’s right. We said it. Humongous. You should share your humongous dreams with people who care for you. Together, you can figure out a way to finance them—to make them happen. Then one day you’ll wake up, rub the sleep from your eyes, and hardly believe it all happened to you. And you’ll live happily ever after. The end.

TO GET STARTED SETTING UP YOUR FAMILY MORTGAGE TODAY, VISIT: WWW.VIRGINMONEY.COM OR CALL 1.800.805.2472

Protection. As long as the loan is secured by real estate, the lender can rest assured that their investment is protected. This can be particularly important when an unforeseen event occurs, such as the death of the borrower. Monthly income stream. Private mortgages generate a recurring income stream from payments - in cash - paid by the borrower. This is an attractive feature relative to other investments, especially for retirees and others on a fixed income.

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HOW CAN WE HELP? VIRGIN MONEY CAN SET UP YOUR FAMILY MORTGAGE. Our team is well versed in facilitating all types of private mortgage transactions. We understand the questions and concerns you may have when arranging a private mortgage, and are skilled in handling unique repayment situations that may arise. Virgin Money offers a variety of services geared to make your private mortgage transaction as secure and successful as possible. Some of our services include:

HOW DO I SET UP A FAMILY MORTGAGE? Even when it’s between relatives, legally binding documents and proper management are necessary for a mortgage. Here’s why: For the borrower, proper documentation will ensure that tax benefits are realized (we provide more details on this below.) For the lender, proper documentation will ensure that he or she is protected in the case of default and foreclosure.

Mortgage documentation and set up. Promissory notes, mortgage recording, title searches, compliance with the Applicable Federal Rate.

By spelling out the loan details you can protect your personal relationships because you are clarifying expectations upfront.

Mortgage payment processing. Repayment schedules tailored to your individual situation, loan restructuring to ensure that missed payments do not lead to default, direct debit and direct deposit of payments, late payment follow up.

Take full advantage of the flexibility of a private mortgage by picking an interest rate and a repayment schedule that meet your unique needs. In the case of an intra-family mortgage, the interest rate and the repayment plan are usually selected to give the borrower a better deal than they might find at a bank.

Payment tracking and accounting. Online account access, year-end reporting for taxes, and record-keeping.

In this section we outline the steps to set up a Virgin Money Family Mortgage. These are: 1. Agree to the terms and payment schedule 2. Create a legally binding document 3. Set up a plan for servicing (managing repayment and reporting) the loan TERMS AND PAYMENT SCHEDULES Following is a list of the basic terms the borrower and lender establish in order to prepare a family mortgage. Amount borrowed The total amount that is to be borrowed.

FIT You have the right to a loan that’ll fit you like a glove—and not a straightjacket. Look, we aren’t slick salespeople. We’re not trying to trick you into buying something that isn’t right for you. If we can help, we’ll let you know. If not, we’ll let you know that too. We’re good like that. We just want everyone to be happy with their loan. Really, is that too much to ask?

TO GET STARTED SETTING UP YOUR FAMILY MORTGAGE TODAY, VISIT: WWW.VIRGINMONEY.COM OR CALL 1.800.805.2472

Repayment start date The date that the mortgage will begin to be repaid. Typically banks set this date no sooner than 30 days from the loan closing to allow time for the paperwork to process. You may want to do the same. Interest rate The loan agreement should clearly state the interest rate to be charged, and whether it is compound or simple interest. The lender and borrower should pick a rate using the following guidelines: 3

REAL PEOPLE. VIRGIN MONEY PROFILES. SEE HOW KEEPING A HOME LOAN IN THE FAMILY CAN PAY OFF. Like many retirees who rely on interest from their retirement savings, Jane Driscoll of Dedham, MA had watched her monthly income drop in recent years with the decline in interest rates. Unbeknownst to Jane, the solution to her declining interest rates would come from her daughter’s purchase of a home. Her daughter, Margaret Driscoll, had recently pre-qualified for a mortgage on a new home. However, when Margaret and Jane discussed the mortgage rate and contrasted it to the rate on Jane’s CDs, they had an idea. A few days prior, Margaret had heard about how Virgin Money can set up and manage intra-family mortgages. After talking with Virgin Money, Margaret and Jane decided it made more sense for Margaret to get her home loan from her mother rather than the bank. “It was crazy to pay all of that interest to a bank when I could just as easily pay it to my mother. It turns out we both benefited,” she said. “My mom nearly doubled her monthly income [compared to her CDs] and I’m paying a lower rate on my mortgage than any bank could offer me.”

Avoid IRS scrutiny. In order for a transfer of private money to be considered a mortgage loan and not a gift, the lender must charge an interest rate at no lower than the minimum rate required by the federal government, called the Applicable Federal Rate (AFR). If you charge less than the AFR, the IRS may view the forgone interest income as a gift from you. Consider the opportunity cost to the lender. The money loaned would most likely be earning a return if invested elsewhere (i.e. a savings account or CD). Consider that alternative and pick a rate that both the borrower and the lender feel is fair given alternative uses of the money. Payments Each payment you make will go towards the principal (the loan amount) and the interest, but you can choose how quickly you pay down the two different amounts. Standard mortgage payments include principal plus interest, but you can also choose to make interest-only or principal only payments. Here are some of the different combinations to consider: Principal Plus Interest. Each installment paid toward repayment of the mortgage consists of two parts, the interest owed and the principal. This is typically how a conventional mortgage from a bank is repaid. Interest Only. Each installment paid toward of the mortgage repays the interest obligation only; the principal balance usually comes due as a lump sum at the end of the mortgage term. Repayment Schedules Mortgage payments are organized into a schedule which determines how much you pay and when you pay it. Traditional bank mortgages are amortized; the borrower pays the same amount every month for the life of the loan. However, consider using a graduated schedule if the borrower has low income now but expects it to increase with time. You might also choose a seasonal loan if the borrower’s income is dependent on a job or business that is seasonal and fluctuates on a predictable pattern throughout the year. Amortized. The repayment schedule consists of payments that are always the same dollar amount and are due at regular payment dates (monthly, quarterly, or annually) for the life of the loan.

TO GET STARTED SETTING UP YOUR FAMILY MORTGAGE TODAY, VISIT: WWW.VIRGINMONEY.COM OR CALL 1.800.805.2472

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REAL PEOPLE. VIRGIN MONEY PROFILES. BORROWING FOR YOUR NEW HOME FROM THE BANK OF MOM AND DAD. Samira Sadeghi and her husband jointly purchased their home, a duplex in the Bay Area, with her parents. It made sense: her parents got on site rental management for an investment property, and Samira and her husband could afford their first home. Last year, her parents paid off the bank loan on the property and then used Virgin Money to hold Samira’s mortgage themselves. Now Samira and her husband make their monthly payments to her parents, who get a 6% return on their money. “I still get my tax deductions and everything you’d get with a bank, but I’m not paying a bank, I’m paying my Dad,” she said “I love the whole idea.”

Graduated. The repayment schedule starts with lower payments initially (monthly, quarterly, or annually) but they gradually increase later in the life of the loan. Seasonal. The repayment schedule where both principal and interest payments are lower during some months of the year and higher in other months of the year (typically used for situations where a borrower’s income is different at different times of the year). Late payments and default In the event of any problems with repayment of the loan, it is important to have the consequences spelled out so both parties are clear about how to handle the situation. Particularly with a family mortgage, the best way to protect the personal relationship is to put into writing the expectations for both parties, and the consequences of failing to meet those expectations. Late payments. Establish the number of days after which each payment is deemed late. This number can range from 0–15. Most Virgin Money clients choose a 10–15 day “grace period” after which a payment is deemed “late” and a late fee becomes due. Our clients’ late payment fee range from 0–$100 and currently average about $25, but you can choose any amount. For family transactions, some clients elect to have no late fee and we have found that this does not impact the borrower’s willingness to make payments on time. This is partially because Virgin Money collects payments in an automated way using direct debit. Default. Once the borrower exceeds the grace period without making a payment, he or she is technically in violation of the contract. Determine what defines a default and what rights you will exercise in the event that a default occurs. If a borrower defaults on a private loan and the lender can show through documentation that the loan was a legitimate one and tried to collect on it, the lender may be able to write off the bad debt portion of the loan as a capital gains loss (subject to annual maximums). CREATE A LEGALLY BINDING DOCUMENT

LOVE You have the right to mix money and relationships, and live to tell the tale. Yes, it can be done. Trust us. And it’s where we come in. We’ll look after your loan and handle all the details. You never even need to talk business with your loan partner unless you want to. So you can mix money with relationships, and still come out happy as a clam. How sweet is that?

TO GET STARTED SETTING UP YOUR FAMILY MORTGAGE TODAY, VISIT: WWW.VIRGINMONEY.COM OR CALL 1.800.805.2472

Once all the terms are set, it’s time to make the agreement legally binding. All family mortgage transactions have two components: Promissory Note. The promissory note establishes the debt between the parties and records how that debt is going to be repaid.

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LEARN MORE... ...WHAT DIFFERENT TYPES OF FAMILY MORTGAGES ARE THERE? A first mortgage - when the entire purchase price is financed solely by the private lender, and there is no bank or other lending institution involved. A second mortgage - used to supplement a bank mortgage, typically for financing a down payment or a renovation. In general, these loans range in size from $25,000 to $75,000. A refinancing - used to pay off a conventional mortgage with a bank, typically trading in a market rate with the bank for a lower rate from family or friends. Virgin Money typically finds that the interest rates charged by family members for refinancing transactions are 1% lower than market rates. Sometimes homeowners will also refinance to take some of the equity out of their home, called a cashout refinance. A private equity loan - when real estate serves as collateral for a private loan; the loan is often used for a renovation or other personal expense.

Mortgage/Deed of Trust. This creates an interest in the real estate to secure repayment of the debt. Attached to the Mortgage/Deed of Trust is a legal description of the property, usually taken from the deed to the property. If the family mortgage transaction is being done to purchase a property, there will need to be a transfer of the title to the property to the borrower in conjunction with the loan. The following materials will need to be prepared as part of the transfer of the title to the property: A deed (transferring the property from seller to buyer). State and federal compliance documents - these vary dependent upon which state you are in and on the circumstances of the transaction. Examples include: • • • •

Transfer tax form Lead paint Smoke detectors IRS seller documents (capital gains)

Legal description of property being transferred (for the deed and to be used in the mortgage) In addition, the following items are optional but are often used in loan transactions, whether for a purchase or for a refinance, especially in traditional bank mortgages: • • • • • •

Appraisal Home Inspection Full title search and title insurance Purchase and sale agreement Real estate taxes (check to see that all are paid) Homeowner’s insurance (paid in advance for one year)

SET UP A PLAN FOR REPAYMENT OF THE LOAN Finally, there will need to be a plan for managing the repayment of the loan. Most parties to a private loan use one of the following two options: You can do it yourself. You can send a check every period by the due date specified in your promissory note. Keep in mind that over 33% of self-administered payments by check are late or missed entirely, and this tends to be a significant cause of strained relationships and misunderstandings. Missed payments also make it difficult to calculate year-end numbers for tax filings.

TO GET STARTED SETTING UP YOUR FAMILY MORTGAGE TODAY, VISIT: WWW.VIRGINMONEY.COM OR CALL 1.800.805.2472

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LEARN MORE... ...HOW CAN THE INTEREST RATE ON A FAMILY MORTGAGE BENEFIT BOTH THE BORROWER AND THE LENDER? Though bank mortgage rates fluctuate over time, they are usually 2–3% higher than the Applicable Federal Rate (AFR), the rate that the IRS requires as a minimum for private loans (see more on this in the next section.) At the same time, the AFR tends to be higher than the rate individuals can earn on short-term cash investments, such as money market accounts and CDs. This means that the parties to a family mortgage can agree to a rate that is lower than a traditionally available mortgage (to the borrower’s benefit) and higher than alternative cash investments (to the lender’s benefit), and that meets the IRS guidelines for a private loan. For example, a son closes on a family mortgage at 4.9% and feels he has won because he is getting the money he needs at less than it is available from banks. His win is felt as a reduction of thousands of dollars in interest payments over the life of the loan. If we assume that his parents were earning 4% keeping their money in CDs, by issuing the mortgage they have increased their investment return from 4% to 4.9%, a win for the parents that is felt in increased monthly cash payments. The 4.9% rate is thus a win for both parties and is acceptable to the IRS because the AFR for that month is 4.59%. In addition, even though the loan is between family members, as long as it is structured as a formal mortgage, the son will also be able to deduct his interest payments on his taxes, just as if the intrafamily mortgage were a bank mortgage. The parents will have the protection of knowing that the loan is secured by real estate, and that they have the option to gain ownership of the home in the case of default, to recapture any loss on the loan.

You can hire a neutral 3rd party such as Virgin Money to manage the repayment. Virgin Money administers payments using direct deposit and direct debit, which makes loan repayment more convenient for both parties and dramatically reduces the likelihood of late payments and default. It also makes it easy at tax-time with all the paperwork ready to be filed. Clients tell us that they also value our optional free credit reporting service which helps borrowers build credit - which they would be unable to do if the loan was managed privately.

TIPS FOR THE BORROWER Being on the borrowing side of a private transaction can be as stressful as being on the lending side. To help you prepare for the conversations with your lender, and for the deal you hope to close, here are three things you—as the borrower—should know. Know how a family mortgage can work. Your request for money might begin as an informal conversation, maybe even over the kitchen table. It might also be a phone call where you bring up the idea and get an encouraging response. While the first contact for a private loan should be informal, soon after you need to demonstrate to the potential lender that you have what it takes to be a good investment. The best way to do this is to make a plan with your lender to formalize the loan. Refer to this guide to show how a family mortgage could work. Be ready to show your potential lender how Virgin Money can manage the process to make it as easy as possible. Your potential lender is more likely to seriously consider your request if you can alleviate their two greatest concerns, that the loan will jeopardize the relationship, and that the money might be lost. Sharing this guide with your potential lender will help you do that. Know how a family mortgage can benefit your lender. In previous pages we have described several ways that a private loan can benefit lenders. Make sure you explain these benefits to your lender. In summary, these are: • Get a higher yield than on other investments. • Get a steady stream of income from an investment that is secured by real estate. • Keep the money in the family. Depending on how much you know about your lender’s finances, you can discuss these benefits as they relate directly to your lender’s circumstances. You should also think through how to respond logically to objections and questions that your lender may have. For example, one typical objection to a request for a family mortgage is that the loan is a 30-year investment and many lenders

TO GET STARTED SETTING UP YOUR FAMILY MORTGAGE TODAY, VISIT: WWW.VIRGINMONEY.COM OR CALL 1.800.805.2472

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LEARN MORE... ...WHAT IS THE DIFFERENCE BETWEEN COMPOUND INTEREST AND SIMPLE INTEREST? Compound interest calculates interest based on the principal and interest; simple interest only calculates interest on the principal amount of money.

do not want to tie up their money for 30 years. Most home buyers refinance or move after 5-7 years, but there is understandably a certain amount of nervousness about committing to a 30-year loan. Explain to your lender that you can refinance the mortgage at any time with a bank or another private lender. They can also add a clause to the mortgage ensuring that they have a legal right to demand full payment and effectively cause refinancing. This is quite common. Know how a family mortgage can benefit you. In previous pages we also described the ways a private loan can benefit borrowers. Since your lender is probably interested at least in part helping you out, it’s a good idea to be able to express and discuss the benefits you receive by getting your loan from a family member instead of from a bank. In summary, these are: • You can set your own interest rate which may be lower than a bank would offer you. • You can set your own repayment schedule to meet the cash flow needs of your new business. • You can make adjustments to your repayment schedule to give you the best chance of repaying the loan. • You can still get the benefit of a federal tax deduction for interest paid just like a traditional bank mortgage. On this last benefit, note that the loan must be structured, documented, and recorded as a private mortgage - rather than an unsecured loan that is not recorded with appropriate local authorities. We do recommend that you consult your tax advisor regarding any changes to the tax laws which may affect the ability to deduct mortgage interest payments.

TIPS FOR THE LENDER FREEDOM You have the right to break free from the hopecrushing, handcuffing, penny-pinching nature of most bank loans. And not look back. Find your own borrower. Or find your own lender. Choose your own interest rate. Create your own repayment schedule. Go on with your bad self. Let the banks keep their lollipops. Keep more of your money. And keep it between your family and friends.

TO GET STARTED SETTING UP YOUR FAMILY MORTGAGE TODAY, VISIT: WWW.VIRGINMONEY.COM OR CALL 1.800.805.2472

Before delving into a mortgage with a relative, make sure you take the following steps. You may also want to discuss the transaction with your attorney or financial planner to make sure it is appropriate in your individual situation. Document the loan. Creating a legally binding document is one of the most important things you can do when handling a family mortgage transaction.

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HOW CAN WE HELP? VIRGIN MONEY CAN MANAGE REPAYMENT OF THE LOAN. In addition to providing the documentation for your private mortgage, Virgin Money will: • Create a repayment schedule. • Setup the bank accounts to take and receive electronic payments (payment can also be received via check or money order). • Record the mortgage with the appropriate government authority to ensure that the borrower can enjoy mortgage interest tax deductions. • Provide knowledgeable customer support. When it comes to the ongoing business of keeping the borrower and lender on track per the terms of the loan, Virgin Money will: • Send a reminder email to the borrower before each payment comes due • Debit the borrower’s bank account as set out in the promissory note (or receive payment via check). • Credit an account designated by the lender. • Send a confirmation email to the lender once the electronic deposit has been completed. • Furnish both parties with year-end tax summary statements that detail the interest and principal paid during that year.

Many people mistakenly assume that it is offensive or inappropriate to ask for formal documentation when arranging to transfer funds between relatives. In fact, structuring formal documentation is perhaps one of the most appropriate things that can be done. Not only does it protect both parties financially, but it also preserves the personal relationship. It can prevent confusion over repayment start dates, interest rates, repayment schedules, grace periods, and other terms of the loan. If your borrower is reluctant to formalize the loan with a legally binding document, you can try one or more of the following explanations: Your Accountant: Explain to your relative that your accountant mandates a fully legally binding agreement before you create a family mortgage transaction. The IRS. Explain to your relative the possibility that you will be audited and that you need to have documentation in order to show that you are setting up a family mortgage, and not making a gift. The Media. Explain that you have heard several stories recently about undocumented transactions jeopardizing family relationships and don’t want to take the chance with your own. Past Experiences. If appropriate, reference past experiences that deal with an informal loan ending poorly for you and the other party. Understand the tax implications. Any interest you earn on a private loan is considered income by the IRS and therefore is considered taxable. You may make a gift of that income, but only up to $12,000 each year, which is the Annual Gift Tax exclusion ($24,000 if made by a couple; $48,000 if made by a couple to a couple). The interest rate should be set at least at the relevant Applicable Federal Rate (see our earlier discussion of the AFR); however, if you do not plan to make any additional gifts to the mortgage recipient, it is possible to set a below-market rate because the foregone interest is not likely to add up to $12,000 unless your mortgage is a multi-million dollar transaction. Interest paid by the borrower can be deductible when the loan is structured properly. Reflect on your own interests. Before you agree to a private mortgage with a relative, be clear about your own interests. Ask yourself why the possibility of a family mortgage appeals to you. Is it because you want to help a friend or relative? Is it because you’ll generate a higher return on your investment than you would in the stock

TO GET STARTED SETTING UP YOUR FAMILY MORTGAGE TODAY, VISIT: WWW.VIRGINMONEY.COM OR CALL 1.800.805.2472

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LEARN MORE... ...HOW DO I DEAL WITH DEFAULT OF A FAMILY MORTGAGE? Basically, in the case of default, individual private lenders have the same tools as a bank. Family lenders have the option to foreclose and to impact the credit rating of the borrower, if necessary. In practice, we have found that for family mortgages, lenders and borrowers prefer to restructure loans rather than foreclose on their relatives. There are various ways that Virgin Money has made it easy to implement loan restructuring. For example, the private lender could: • Forgive the missed payment completely, in other words, make a gift of the amount of the payment. Just be aware that if you exceed $12,000 in forgiven payments in a year you will be exceeding your gift tax exclusion for the year, per IRS regulations. • Agree that the borrower will skip a pay ment one month and then double up in a later month. • Postpone the entire payment schedule for an agreed upon period, until the borrower is able to stabilize his or her financial situation and resume the payment schedule. • Require that the borrower add the payment to the end of the loan term. The payment schedule changes listed above do not require a new promissory note. Payment schedule changes that do require a new note include a change on loan type (secured/unsecured), a change in the interest rate, or a complete restructuring of the payment schedule from one form to another (such as from amortized to graduated.)

TO GET STARTED SETTING UP YOUR FAMILY MORTGAGE TODAY, VISIT: WWW.VIRGINMONEY.COM OR CALL 1.800.805.2472

market or in a savings account? Chances are, it’s a combination of both. Articulate your goals as a lender and share these with your borrower. If you are planning to loan to a family member, be sensitive that such a loan might raise some emotional issues for other family members, such as jealousy. The best approach is to be open with your family about the loan, and make the same opportunity - possibly even at the same terms - available to other family members. Clarity in the legal document about who does what in the case of late payments or default also prevents a difficult situation down the road if the loan should turn bad. Certainly, if you have a spouse, it’s best to discuss the transaction before signing the papers. Make sure that you are in agreement about the terms and expectations of the arrangement.

Q&A Q: I’m making a loan to my sister so that she can purchase a home. Why can’t I just download a free promissory note from the Internet to document the family mortgage instead of paying for a family mortgage through Virgin Money? A: Sure you could. But this is a risky choice. If you use a simple promissory note, you and your sister will need to do several things on your own to ensure that you minimize financial risk, enjoy tax benefits (mortgage interest tax deduction), and avoid emotional pitfalls of interpersonal transactions. You’ll need to: • Create a mortgage agreement, not just a promissory note. • Record the mortgage with public authorities. • Manage the repayment plan. • Recalculate the schedule to accommo date missed payments, late payments, and partial payments. • Keep track of interest payments and prepare a 1098 form for the IRS. Usually, a loan such as a mortgage that takes place over a period of years will bring different circumstances for each party as the years pass. Payments could be neglected; agreements and promissory notes can be stashed in a drawer or closet so that the terms are forgotten or ignored. By managing the entire repayment process of your loan, including payment processing, online accounts, and proven methods of payment collection, Virgin Money relieves you of having to manage your loan and reduces any stress to the personal relationship that the loan might cause. In other words, Virgin Money can provide a buffer, allowing you to keep your loan separate from your personal relationship. 10

HOW CAN WE HELP? VIRGIN MONEY CAN TAKE CARE OF YOUR DOCUMENTATION NEEDS. Virgin Money provides the financing documents for a real estate transaction: the promissory note, the mortgage itself, and the legal description. Virgin Money will also record your mortgage with your local Registry of Deeds. In addition to the financing documents for a real estate transaction, Virgin Money also offers related services, including advanced title searches, title insurance and notary public/closing agents who will come to your door. And of course, Virgin Money provides loan management services for administering the repayment of your loan once it is signed and recorded. Call to speak with a private loan specialist to determine which of the following services you will need in addition to documentation. • Basic Owner Search: This provides the name of the current owner, a legal description of the property, and basic property tax information. • Property Search: This provides the name of the current owner, a legal description for the property, tax information including the current status of tax payments, and a listing of all mortgages and deeds of trust currently pending against the property. • Full Title Search: This search includes items listed under Property Search as well as a detailed report on the property going back 60 years (depending on the state), all outstanding liens/encumbrances (mortgages, deeds of trust, judgments, liens, UCC filings, tax liens, etc.) pending against the property for any party, enhanced property tax information including special assessments against the property and any exemptions for the property. • Tax Escrow Account: This is the monthly payment of a portion of the real estate taxes into an account which is then used to pay the taxes when they are due. • Insurance Escrow Account: This is the monthly payment of a portion of the homeowner’s insurance into an account which is then used to pay the insurance when it comes due.

Q: Do we have to keep track of the interest income? A: Yes, you must report to the IRS all interest payments as income for the lender and deductions for the borrower. A benefit of using Virgin Money is that we can keep track of interest income for you, and provide a year-end report for tax purposes. Q: Why does it matter that I record the mortgage with public authorities? A: If your borrower wants to deduct mortgage interest, the mortgage must be recorded with the relevant registry of deeds. In the event of a default or an audit, you must show that your transaction was in fact legitimate. If you want to write-off a defaulted loan or mortgage as bad debt, you must show that you did in fact have documentation, that your transaction was legitimate, and that you did try to collect on it. This means that you must keep detailed and accurate records of the logistics of the loan, including each payment, interest rates, and other structures. Virgin Money can handle all the aspects of managing and recording your mortgage so that you have detailed documentation for public authorities. Q: What will other relatives say about this loan? A: If you are a parent setting up a mortgage with one child, you may be worried about other children becoming resentful. We recommend that you explain your reasoning to your children and let them know that you are structuring the loan as a business investment for both you and the borrower, not gifting money arbitrarily. You should also consider making similar resources available on similar terms to other children. This will reduce the likelihood that you will be accused of playing favorites. Q: If interest rates go up or if I can make a higher return on alternative investments in the future, can I increase the interest rate on the mortgage? A: Yes. There are two options for you in this case. If you have structured a promissory note with a demand feature, you should not have a problem with getting back your funds so you can make an alternative investment. One thing to keep in mind is that if you are going to incorporate the demand feature into your promissory note, it’s a good idea to determine the process with which you intend to demand payment (i.e. in writing, orally), and how long you will give the borrower to pay back the money after you demand it. Alternatively, when you are setting up the loan, you might want to consider structuring the mortgage with an adjustable rate linked to a market rate such as the prime rate.

TO GET STARTED SETTING UP YOUR FAMILY MORTGAGE TODAY, VISIT: WWW.VIRGINMONEY.COM OR CALL 1.800.805.2472

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HOW CAN WE HELP? WE CAN WORK WITH YOUR ATTORNEY. Private real estate transactions in the following states typically require the involvement of a local real estate attorney: CONNECTICUT DELAWARE GEORGIA MASSACHUSETTS NEW JERSEY WEST VIRGINIA However, in each of these states, you can still use our loan servicing including: • Automatic payment processing. • Online record-keeping and account management. • Year-end annual summary reports for taxes.

Q:What happens if my borrower loses his or her job? A: There are a number of unexpected events during the life of a loan that may take place, and unemployment for the borrower is one of them. If the borrower is unable to continue making payments during a period of financial distress, Virgin Money makes it easy to restructure the loan and keep it on track to be repaid. For example, depending on your situation, you can choose to make the loan payments interest-only to lower the burden on the borrower, or you can choose to forgive the missed payments, spread them out over the course of the mortgage, or add them to the end of the term with a balloon payment. Virgin Money specializes in different types of loan restructuring options while keeping the initial terms of the agreement intact. In our experience, this reduces the risk of foreclosure and helps keep the relationship intact.

Call us to determine the best role for Virgin Money in your family mortgage.

TALK You have the right to talk about money. And not just when it’s time to split the check. Whether you’re offering a loan or asking for one, it’ll probably be a little awkward at first. But don’t let that stop you. Speak from the heart. Be honest. Just don’t be shy. Good things can come from this single conversation. Besides, compared to the birds and the bees, this one’s easy.

TO GET STARTED SETTING UP YOUR FAMILY MORTGAGE TODAY, VISIT: WWW.VIRGINMONEY.COM OR CALL 1.800.805.2472

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ABOUT VIRGIN MONEY We are not a bank. We are not your attorney. We are a financial services company, and we manage loans and mortgages that fit you. That last part’s really important. They fit your needs. They fit your dreams. They fit your wallet because they’re for you. Some call that revolutionary. We call it changing the face of money. We’ve been doing it for years. We’ve seen over $200 million in loans and mortgages as CircleLending. Now, with the backing of the Virgin brand, we’re stretching higher and farther than ever to offer products that bring money and people closer together. HOW WE DO IT We take the simple steps that make sense when you’re doing a loan or mortgage. The secret to our sauce (shh!) is a huge helping of friendly, knowledgeable and reliable support from our team. Every step of the way. Here is our process: Document the loan Set up a repayment schedule Transfer payments from borrower to lender according to the schedule Email regular statements and reminders Send year-end reports for claiming tax deductions Take your pick of our real estate products: we offer a Family Mortgage, a Seller Mortgage or a Retirement Mortgage. Entrepreneurs can use a Business Builder loan to raise capital but stay focused on their business. Anyone can come up with a good use for a Handshake Plus personal loan. New car? Tuition? Wedding? Draft a loan online and you’re on your way.

VALUE You have the right to get way more than you pay for. To the point where you almost feel bad about it. But don’t feel bad. That would be silly. Of course we’ll give you great products at fair prices. No brainer, there. But we’ll also give you other things-like straight answers to your questions and brilliant customer service. And we mean like, pass-the-sunblock brilliant.

TO GET STARTED SETTING UP YOUR FAMILY MORTGAGE TODAY, VISIT: WWW.VIRGINMONEY.COM OR CALL 1.800.805.2472

At the end of the day, we want to make your loan a success and you happy. Why? One, so you’ll refer your family and friends to us. And two, because it makes us feel good.

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HOURS OF OPERATION ARE M - F: 9AM - 7PM ET

TO GET STARTED SETTING UP YOUR FAMILY MORTGAGE TODAY, VISIT: WWW.VIRGINMONEY.COM OR CALL 1.800.805.2472

CALL US AT 1.800.805.2472

IT’S FREE. WE’RE PRETTY NICE. AND WE WON’T KEEP CALLING UNLESS YOU WANT US TO.

VISIT: WWW.VIRGINMONEY.COM

CALL TO DISCUSS YOUR OPTIONS WITH ONE OF OUR PRIVATE LOAN SPECIALISTS.